OPME Case::Risk management at Microsoft

Microsoft is the world's best-known computer software company. Microsoft offers a wide range of
software products for various computing devices. The company faces many risks.

These include technology risks, operational risks, marketing risks, intellectual property risks, regulatory
risks, legal risks and financial risks. The case outlines the mechanisms Microsoft employs to deal with
these risks, with a focus on technology related risks.

Microsoft, founded as a partnership in 1975 and incorporated in 1981 was clearly the world's best-
known computer software company. The company's vision, shaped by cofounder, Bill Gates, one of the
world's best-known business leaders was to empower people through great software. Microsoft offered
a wide range of software products for various computing devices.

These included scalable operating systems for servers, personal computers (PCs), and intelligent devices;
server applications for client/server environments; information worker productivity applications;
business solutions applications and software development tools. During fiscal 2002, Microsoft launched
Xbox, a next-generation video game system.

The company's online efforts included the MSN network of Internet products and services and alliances
with companies involved with broadband access and various forms of digital interactivity.

During fiscal 2002, Microsoft had four defined major business segments: Desktop and Enterprise
Software and Services; Consumer Software, Services, and Devices and Consumer Commerce
Investments.

A significant portion of Microsoft's focus in the early 2000s was on the .NET architecture.

Using common industry standards based on XML1, a universal language for describing and exchanging
data, .NET's goal was to enable seamless sharing of information across many platforms and
programming languages, and over the Internet.

Microsoft had also embarked on a long-term initiative called Trustworthy Computing, which aimed at
providing an enhanced level of security, privacy, reliability, and business integrity to computer systems.
The software business was inherently risky, as it was subject to rapid technological change. Microsoft
anticipated more intense competition as it moved from its traditional core businesses to the new .NET
architecture. Microsoft also faced a shift from PC-based applications to server-based applications or
Web-based application hosting services, from proprietary software to open source software such as the
Linux operating system, and from PCs to Internet-based devices. Some of Microsoft's powerful rivals,
including IBM, Sun Microsystems, Oracle, and AOL-Time Warner, were collaborating with one another
on various initiatives, aimed at moving software from individual PCs to centrally managed servers...

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Technology Risks

Technology management was a critical activity for Microsoft. During fiscal years 2000, 2001,
and 2002, Microsoft spent $3.77 billion (16.4% of revenues), $4.38 billion (17.3%), and $4.31
billion (15.2%) respectively on R&D. Most of Microsoft's software products were developed
internally. Microsoft believed internal development allowed it to maintain closer technical
control over its products and gave it the freedom to designate which modifications and
enhancements were most important and when they should be implemented...
Operational Risks

There was little manufacturing or logistics involved in the software business. Software could be
easily copied on to a medium such as Compact Disc or moved electronically to customers across
the world without problems.

Maintaining quality was a strategic challenge for Microsoft. Indeed, the presence of bugs in its
products was a major risk faced by Microsoft. If a product had a fatal bug that destroyed user
data or prevented some critical feature from working, then Microsoft had to send out a product
update release to correct the problem...

Marketing Risks

Challenges to Microsoft's Business Model

Since its inception, Microsoft's business model had been based on customers agreeing to pay a
fee to license software, the company developed and distributed. Under this commercial software
development ("CSD") model, software developers developed new products through investments
in research and development. They offset these costs with the revenues received from the
distribution of their products. In recent years, there had been a growing challenge to the CSD
model, from the Open Source movement...

Intellectual Property Risks

Unlicensed copying and use of software represented a significant loss of revenue to Microsoft especially
in developing countries. While this adversely affected U.S. revenues, revenue loss was even more
significant outside the United States, particularly in developing countries where intellectual property
laws were less stringent.

Throughout the world, Microsoft actively educated consumers on the benefits of licensing genuine
products and educated lawmakers on the advantages of creating a business climate where intellectual
property rights were adequately protected...

Financial Risks
Microsoft was exposed to foreign currency, interest rate, and equity price risks. Microsoft
hedged its foreign currency receivables and a portion of anticipated foreign currency revenues,
primarily with option contracts. Microsoft monitored its foreign currency exposures on a daily
basis to maximize the overall effectiveness of its foreign currency hedge positions. Principal
currencies hedged, were the Euro, Japanese yen, British pound, and Canadian dollar...

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Legal Risks

Microsoft was a defendant in a lawsuit filed by the Antitrust Division of the U.S. Department of Justice
(DOJ) and a group of eighteen state Attorneys General alleging violations of the Sherman Act and
various state antitrust laws. After the trial, the District Court stated that Microsoft had violated Sections
11 and 22 of the Sherman Act and various state antitrust laws. On May 18, 1998, the United States and a
group of State plaintiffs filed complaints, alleging antitrust violations by Microsoft and seeking
injunctions against the company's allegedly unlawful conduct...

Analyse the case suggesting Risk Management strategies for Microsoft.

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